This chapter is from the book

1. There's no escaping risk.

Once you decide to put your money to work to build long-term wealth, you have
to decide, not whether to take risk, but what kind of risk you wish to take. Do
what you will, capital is at hazard, just as the Prudent Man Rule assures
us.

Yes, money in a savings account is dollar-safe, but those safe dollars are
apt to be substantially eroded by inflation, a risk that almost guarantees you
will fail to reach your capital accumulation goals.

And yes, money in the stock market is very risky over the short-term, but, if
well-diversified, should provide remarkable growth with a high degree of
consistency over the long term.

2. Buy right and hold tight.

The most critical decision you face is getting the proper allocation of
assets in your investment portfolio - stocks for growth of capital and growth of
income, bonds for conservation of capital and current income. Once you get your
balance right, then just hold tight, no matter how high a greedy stock market
flies, nor how low a frightened market plunges. Change the allocation only as
your investment profile changes. Begin by considering a 50/50 stock/bond
balance, then raise the stock allocation if:

You have many years remaining to accumulate wealth.

The amount of capital you have at stake is modest (i.e. your first
investment in a corporate savings plan).

You have little need for current income.

You have the courage to ride out the booms and busts with reasonable
equanimity.

As these factors are reversed, reduce the 50 per cent stock allocation
accordingly.

3. Time is your friend, impulse your enemy.

Think long term, and don't allow transitory changes in stock prices to
alter your investment program. There is a lot of noise in the daily volatility
of the stock market, which too often is a tale told by an idiot, full of sound
and fury, signifying nothing'.

Stocks may remain overvalued, or undervalued, for years. Realize that one of
the greatest sins of investing is to be captured by the siren song of the
market, luring you into buying stocks when they are soaring and selling when
they are plunging. Impulse is your enemy. Why? Because market timing is
impossible. Even if you turn out to be right when you sold stocks just before a
decline (a rare occurrence!), where on earth would you ever get the insight that
tells you the right time to get back in? One correct decision is tough enough.
Two correct decisions are nigh on impossible.

Time is your friend. If, over the next 25 years, stocks produce a 10% return
and a savings account produces a 5% return, $10,000 would grow to $108,000 in
stocks vs. $34,000 in savings. (After 3% inflation, $54,000 vs. $16,000). Give
yourself all the time you can.

4. Realistic expectations: the bagel and the doughnut.

These two different kinds of baked goods symbolize the two distinctively
different elements of stock market returns. It is hardly farfetched to consider
that investment return - dividend yields and earnings growth - is the bagel of
the stock market, for the investment return on stocks reflects their underlying
character: nutritious, crusty and hard-boiled.

By the same token, speculative return - wrought by any change in the price
that investors are willing to pay for each dollar of earnings - is the spongy
doughnut of the market, reflecting changing public opinion about stock
valuations, from the soft sweetness of optimism to the acid sourness of
pessimism.

The substantive bagel-like economics of investing are almost inevitably
productive, but the flaky, doughnut-like emotions of investors are anything but
steady - sometimes productive, sometimes counterproductive.

In the long run, it is investment return that rules the day. In the past 40
years, the speculative return on stocks has been zero, with the annual
investment return of 11.2% precisely equal to the stock market's total
return of 11.2% per year. But in the first 20 of those years, investors were
sour on the economy's prospects, and a tumbling price-earnings ratio
provided a speculative return of minus 4.6% per year, reducing the nutritious
annual investment return of 12.1% to a market return of just 7.5%. From 1981 to
2001, however, the outlook sweetened, and a soaring P/E ratio produced a sugary
5% speculative boost to the investment return of 10.3%.

Result: The market return leaped to 15.3% - double the return of the
prior two decades.

The lesson: Enjoy the bagel's healthy nutrients, and don't
count on the doughnut's sweetness to enhance them.

Conclusion: Realistic expectations for the coming decade suggest
returns well below those we have enjoyed over the past two decades.

5. Why look for the needle in the haystack? Buy the haystack!

Experience confirms that buying the right stocks, betting on the right
investment style, and picking the right money manager - in each case, in advance
- is like looking for a needle in a haystack.

When we do so, we rely largely on past performance, ignoring the fact that
what worked yesterday seldom works tomorrow. Investing in equities entails four
risks: stock risk, style risk, manager risk, and market risk. The first three of
these risks can easily be eliminated, simply by owning the entire stock market -
owning the haystack, as it were - and holding it forever.

Yes, stock market risk remains, and it is quite large enough, thank you. So
why pile those other three risks on top of it? If you're not certain
you're right (and who can be?), diversify.

Owning the entire stock market is the ultimate diversifier. If you can't
find the needle, buy the haystack.

6. Minimize the croupier's take.

The resemblance of the stock market to the casino is not far-fetched. Yes,
the stock market is a positive-sum game and the gambling casino is a zero-sum
game . . . but only before the costs of playing each game are deducted. After
the heavy costs of financial intermediaries (commissions, management fees,
taxes, etc.) are deducted, beating the stock market is inevitably a loser's
game. Just as, after the croupiers' wide rake descends, beating the casino
is inevitably a loser's game. All investors as a group must earn the
market's return before costs, and lose to the market after costs, and by
the exact amount of those costs.

Your greatest chance of earning the market's return, therefore, is to
reduce the croupiers' take to the bare-bones minimum. When you read about
stock market returns, realize that the financial markets are not for sale,
except at a high price. The difference is crucial. If the market's return
is 10% before costs, and intermediation costs are approximately 2%, then
investors earn 8%. Compounded over 50 years, 8% takes $10,000 to $469,000. But
at 10%, the final value leaps to $1,170,000Ñnearly three times as much .
. . just by eliminating the croupier's take.

7. Beware of fighting the last war.

Too many investors - individuals and institutions alike - are constantly
making investment decisions based on the lessons of the recent, or even the
extended, past. They seek technology stocks after they have emerged victorious
from the last war; they worry about inflation after it becomes the accepted
bogeyman, they buy bonds after the stock market has plunged.

You should not ignore the past, but neither should you assume that a
particular cyclical trend will last forever. None does. Just because some
investors insist on fighting the last war, you don't need to do so
yourself. It doesn't work for very long.

8. Sir Isaac Newton's revenge on Wall Street - reversion to the
mean.

Through all history, investments have been subject to a sort of Law of
Gravity: What goes up must go down, and, oddly enough, what goes down must go
up. Not always of course (companies that die rarely live again), and not
necessarily in the absolute sense, but relative to the overall market norm.

For example, stock market returns that substantially exceed the investment
returns generated by earnings and dividends during one period tend to revert and
fall well short of that norm during the next period. Like a pendulum, stock
prices swing far above their underlying values, only to swing back to fair value
and then far below it.

Another example: From the start of 1997 through March 2000, NASDAQ stocks
(+230%) soared past NYSE-listed stocks (+20%), only to come to a screeching
halt. During the subsequent year, NASDAQ stocks lost 67% of their value, while
NYSE stocks lost just 7%, reverting to the original market value relationship
(about one to five) between the so-called New Economy' and the Old
Economy.

Reversion to the mean is found everywhere in the financial jungle, for the
mean is a powerful magnet that, in the long run, finally draws everything back
to it.

9. The hedgehog bests the fox.

The Greek philosopher Archilochus tells us, the fox knows many things, but
the hedgehog knows one great thing. The fox - artful, sly, and astute -
represents the financial institution that knows many things about complex
markets and sophisticated marketing. The hedgehog - whose sharp spines give it
almost impregnable armor when it curls into a ball - is the financial
institution that knows only one great thing: long-term investment success is
based on simplicity.

The wily foxes of the financial world justify their existence by propagating
the notion that an investor can survive only with the benefit of their artful
knowledge and expertise. Such assistance, alas, does not come cheap, and the
costs it entails tend to consume more value-added performance than even the most
cunning of foxes can provide. Result: The annual returns earned for investors by
financial intermediaries such as mutual funds have averaged less than 80% of the
stock market's annual return.

The hedgehog, on the other hand, knows that the truly great investment
strategy succeeds, not because of its complexity or cleverness, but because of
its simplicity and low cost. The hedgehog diversifies broadly, buys and holds,
and keeps expenses to the bare-bones minimum. The ultimate hedgehog: The
all-market index fund, operated at minimal cost and with minimal portfolio
turnover, virtually guarantees nearly 100% of the market's return to the
investor.

In the field of investment management, foxes come and go, but hedgehogs are
forever.

10. Stay the course: the secret of investing is that there is no
secret.

When you consider these previous nine rules, realize that they are about
neither magic and legerdemain, nor about forecasting the unforecastable, nor
about betting at long and ultimately unsurmountable odds, nor about learning
some great secret of successful investing. For there is no great secret, only
the majesty of simplicity. These rules are about elementary arithmetic, about
fundamental and unarguable principles, and about that most uncommon of all
attributes, common sense.

Owning the entire stock market through an index fund - all the while
balancing your portfolio with an appropriate allocation to an all bond market
index fund - with its cost-efficiency, its tax-efficiency, and its assurance of
earning for you the market's return, is by definition a winning strategy.
But if only you follow one final rule for successful investing, perhaps the most
important principle of all investment wisdom: Stay the course!

John C. Bogle is Founder of The Vanguard Group, Inc., and President of the
Bogle Financial Markets Research Center.

The Vanguard Group is one of America's two largest mutual fund
organizations, and comprises more than 100 mutual funds with current assets
totaling more than $500 billion. Vanguard 500 Index Fund, now the largest mutual
fund in the world, was founded by Mr. Bogle in 1975. It was the first index
mutual fund.

For his exemplary achievement, excellence of practice, and true leadership,
Mr. Bogle holds the AIMR Award for Professional Excellence, and is also a member
of the Hall of Fame of the Fixed Income Analysts Society, Inc.

In 1999, he was named by Fortune magazine as one of the investment
industry's four Giants of the 20th Century.

<

Books

Bogle on Mutual Funds, Irwin, 1993
Common Sense Mutual Funds, John Wiley, 1999
John Bogle on Investing: The First 50 Years, McGraw-Hill, 2000